MONEY TALKS: Ringing the changes Telecom

You don't have to be an
avid reader of the business pages to have an opinion on
Telecom. In fact it's probably better for your blood
pressure if you don't.

Last week we had Telecom parade
itself in the six-monthly corporate earnings ritual where it
opens up its books for analysts to rake over the coals and
use their own arcane methods to predict future
profitability. The earnings themselves weren't too much out
of the ordinary: falling sales as people quit using
landlines, but increased profitability as it scrapes out
more and more savings.

Even jobs cuts which will run into
the hundreds didn't surprise too much - there was a hint in
a Dominion Post story just before earnings and Telecom's
been on a drive to trim its wage bill for several years now.

This was all par for the course.

What was more
surprising was new chief executive Simon Moutter's looming
stamp coming to the company.

Moutter is an old hand when
it comes to Telecom. He was seen as Theresa Gattung's
heir-apparent, and left to head up Auckland International
Airport when he was passed over for the giant Scotsman Paul
Reynolds.

Now he's back and has hit the ground running.

At last week's analyst briefing on the latest result,
Moutter gave everyone a flash of his hand before the May
investor day when all will be revealed.

Teleco faces
material restructuring costs which will crystallise losses.
Reading between the lines, anything that is losing money
will be gone.

"We want to optimise the business around
areas of highest value to the customer," Moutter said. And
that meant staff wouldn't get any sugar-coating when their
jobs are cut as he does things "fast, fairly and
fearlessly."

This is brave new territory kind of stuff
for a company that's often tread cautiously for fear of
upsetting the horses among both politicians, who used to
regulate Telecom, and its easily irritated
customers.

Nonetheless, Telecom was clearly going to be in
for a shake-up once it got rid of Chorus and finished its
long-running battles with the competition regulators in the
process. We imagined that was going to be in a fibre-based
world.

But Moutter has slightly different ideas to what
Paul Reynolds regularly told us, with mobile and data
services the new centre of his world.

And looking at the
numbers you can't argue. Mobile was by far and away the best
performing unit for Telecom in the final six months of 2012.
It was the only business unit to increase sales, logging
$455 million which made it the biggest earner.

Most of
that growth was from data services, meaning there's more
scope for Telecom to do things without wires than with them.
That's a far cry from what we were hearing when Telecom was
pitching Chorus to build the government's ultrafast
broadband network. In fact, it's and something that should
be scaring the infrastructure company.

What's more,
Communications Minister Amy Adams has announced the auction
later this year of 4G radio spectrum - which lets you go
really fast on mobile devices.

For the first time in a
while, that means Telecom is looking at new top-line revenue
opportunities.

Remember, the way Telecom managed to
improve its profitability in the period just gone was by
clamping down on the terms of its Chorus contracts, trimming
bits here and hardening up deals there.

Which begs the
question as to what Telecom should be selling.

Is it
worth Telecom continuing to offer landline services over
Chorus' copper lines, or should it just ditch that business
entirely and use web-based alternatives?

Why does it need
to keep its stake in the Southern Cross Cables trans-Pacific
fibre-optics company if it's going to co-invest with rivals
Vodafone and Telstra to build a new trans-Tasman cable, with
much better specifications?

Is it time for Telecom to quit
the ill-fated AAPT experiment in Australia altogether, and
is the international calling business past its use-by
date?

Are there better ways to service corporate clients
than through Gen-i? And how long will Telecom keep running
its Xtra email service?

These are the more interesting
questions to start asking than simply how many more jobs
will the company cut.

When Telecom and Chorus went their
separate ways, the general thinking was that the network
operator would be a run-of-the-mill infrastructure play
spitting out regular dividends, while the retail unit would
provide growth opportunities as a riskier venture.

Telecom's shares have gained 19 percent since the split
in November 2011, recently trading at $2.305 apiece and have
paid out 28 cents per share in dividends across three
reporting period.

That's not too shabby a return for a
company whose costs are more expensive than its rivals, so
if you don't have the stomach for a radical overhaul of the
second-biggest company on the stock exchange, maybe it might
be time to cash in your chips.

Because by the end of the
year Telecom is going to be a far cry from the
straightforward phone company we all know and love.

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